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The online advertising market seems to be on an inexorable path of steep growth.

No less an advertising authority than Sir Martin Sorrell, CEO of the advertising behemoth WPP, was yesterday reported as saying that he expects online advertising to double in a few years. 

"About 15% of our business is internet, and this will be 30% in 10 years," he told the New York Sun.

Of course, the potential for online advertising is underscored by the $130 billion market capitalisation of Google which Sir Martin points out is almost nine times the size of WPP’s even though its annual revenue is half his own company’s $10 billion.

The scale of online ad growth is also clear from ZenithOptimedia’s July figures. It predicts that the internet will account for 7.0% of worldwide ad expenditure by 2008, up from its 6.5% forecast in April and 6.0% forecast in December.

Given that online accounted for 4.7% in 2005, internet ad expenditure (including display advertising and paid search) will have grown 76% between 2005 and 2008 if the forecast is correct.

It is no wonder that traditional advertisers are scared.

Sir Martin said: “The 800-pound gorilla in the advertising world is Google, which many fear will continue to lure advertising revenues away from both advertising agencies and traditional press outlets.”

But despite the success of online advertising, typified by the likes of Google, Yahoo! and MSN, there are reasons for caution, according to some commentators.

A recent McKinsey Quarterly article, entitled A Reality Check for Online Advertising, suggests that all is not necessarily rosy in the internet garden.

The article, based on interviews with leading advertisers and agencies, highlights potential supply bottlenecks for online video and paid search advertising which could constrain growth.

The study says that “the utilization of the most attractive digital-ad vehicles is already quite high and that, without large increases in the level of online advertising ‘inventory’, demand could outstrip supply over the next 24 months.”

The research - by Chris Grosso, Amy Guggenheim Shenkan, and Hobart P. Sichel -points out that growth in the overall number of searches has already started to slow, from 30% in 2004 to 20% in 2005.

Their article goes on to say that the maximum current value of paid-search advertising is about $7 billion “without significant changes in consumer click-through rates or in the prices advertisers are willing to pay”.

(Caution: this figure seems low to us given that the search revenues of Google, Yahoo, MSN and MIVA must be well in excess of this figure.)

In response to these McKinsey findings Guy Phillipson, chief executive of the Internet Advertising Bureau (UK), said that challenges are to be expected in a market which is growing so quickly.

He said: “With more advertisers taking online advertising seriously, media owners are finding that their inventory is selling out faster,” he said. “The late copy initiative, headed by the IAB and AOP, has been developed to help deal with this very issue, ensuring more efficient use of the inventory available.”

The IAB head said that PPC bids will increase as long as the ROI from search remains strong, rightly pointing out that clients will get cleverer with their combined PPC and SEO strategies. The launch of Microsoft’s adCenter is also expected to add inventory to the medium, he said.

The increased use of behavioural targeting will play an important part in improving efficiency by picking up target audiences in unsold inventory, he argued.  

He added: “Planners need to play their part as well though, by being more creative and looking further afield than the main portals to reach their audiences. After all, most people have a repertoire of between 20 and 50 sites that they visit on a regular basis.

The pool of available inventory is by no means stagnant though. If there is advertising to support it, media owners will expand their existing sites or even launch new sites, Handbag.com’s launch of GetLippy being one example."

The McKinsey research raises two other interesting points which the IAB are taking steps to address.

The American research said that the shift in the amount of ad budget going online could be slowed by a “dearth of ad agencies” which can manage both traditional and digital campaigns.

Mr Phillipson said: “The shortage of skilled and experienced workers in the UK online industry has been recognised for some time now, and it’s not just agencies that are facing this problem.

"This is no doubt hindering the growth of many businesses, but there are ways of dealing with this in the short term, drafting in ‘white label’ digital specialists for instance, and as far as we are aware, no companies are turning away work because of a lack of resource.”

Secondly, the McKinsey research found that some marketers are frustrated that there is no widely accepted metric or currency to gauge the reach and impact of digital media.

In order to address this issue, the IAB recently announced a research initiative aimed at helping online marketers and brand advertisers in a move which it says is a “significant step towards the establishment of a single online planning currency".

You can read our thoughts on this – and the IAB’s thoughts on our thoughts – in a previous blog post and comment.

Linus Gregoriadis

Published 14 July, 2006 by Linus Gregoriadis

Linus Gregoriadis is Research Director at Econsultancy. Follow him on Twitter or connect via LinkedIn or Google+.

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